Summary of Insurance and Risk Management

In this article, we are going to discuss about the summary of Insurance and Risk Management. So without any unnecessary talking let’s jump in to the main topic. For better understanding let’s read the whole article;

  • Risk management is a process to identify loss exposures faced by an organization or individual and to select the most appropriate techniques for treating such exposures.
  • Risk management has several important objectives. Pre-loss objectives include the goals of economy, reduction of anxiety and meeting legal obligations. Post-loss objectives include survival of the firm, continued operation, stability of earnings, continued growth, and social responsibility.
  • There are four steps in the risk management process ; 1/Identify loss exposures 2/Measure and analyze the loss exposures. 3/Select the appropriate combination of techniques for treating the loss exposures.4/Implement and monitor the risk management program.
  • Risk control refers or techniques that reduce the frequency of severity of losses. Major risk-control techniques include avoidance, loss prevention, and loss reduction.
  • Risk financing refers to techniques that provide for the funding of losses after they occur. Major risk-financing techniques include retention, no-insurance transfers, and commercial insurance.
  • Avoidance means that a loss exposure is never acquired or an existing loss exposure is abandoned. Loss prevention refers to measures that reduce the frequency of a particular loss. Loss reduction refers to measures that reduce the severity of a loss after it occurs.
  • Retention means that the firm retains part of all of the losses that result from a given loss exposure. This technique can be used if no other method of treatment is available, the worst possible loss is not serious, and losses are fairly predictable. Losses can be paid out of the firm’s current income; an unfunded or funded reserve can be established to pay losses; a credit line with a bank provide funds to pay losses; or the firm can form a captive insurer.
  • The advantages of retention are the saving of money on insurance premiums, lower expenses, greater incentive for loss prevention, and increased cash flow. Major disadvantages are possible higher losses exceed the loss component in insurance premiums, possible higher expenses if loss-control and claims personnel must be hired, and possible higher taxes.
  • A captive insurer is an insurer that is owned and established by a parent firm for the purpose of insuring the parent firm’s loss exposures. Captive insurers are often formed because of difficulty in obtaining insurance, or to take advantage of a favorable regulatory environment. They can also provide for lower costs; easier access to a re-insurer; and the formation of a profit center.
  • Self-insurance or self funding is a special form of planned retention by which part or all of a given loss exposure is retained by the firm.
  • No-insurance transfers are methods other than insurance by which a pure risk and it’s financial consequences are transferred to another party.
  • No-insurance transfers have several advantages. The risk manager may be able to transfer some uninsurable exposures. No-insurance transfers may cost less than insurance; and the potential loss may be shifted to another party who is in a better position to exercise loss control.
  • No-insurance transfers also have several disadvantages. The transfer of a potential loss may fail because the contract language is ambiguous; the firm is still responsible for the loss if the party to whom the potential loss is transferred is unable to pay the loss; and an insurer may not give sufficient premium credit for the transfers.
  • Commercial insurance can also be used in a risk management program. Use of insurance involves the selection of insurance coverages, selection of an insurer, negotiation of contract terms with the insurer, dissemination of information concerning the insurance coverage and periodic review of the insurance program.
  • A risk management program must be properly implemented and administered. This effort involves preparation of a risk management policy statement, close cooperation with other individuals and departments and periodic review of the entire risk management program.
  • The principles of corporate risk management can also be applied to a personal risk management program.

So, all these are the summaries of Insurance and Risk Management. Hope you might have got full details about Insurance and Risk Management.

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